Entrepreneurs need to return to a spirit of ‘bootstrapping’

Monday, April 20, 2009 at 12:27am

Candace Moonshower, News Correspondent

Jeff Cornwall, Betsy Jones and Clint Smith all have their own take on how the economic downturn affects entrepreneurs.

Every generation has its inspirational maxim, and it is not surprising that these sayings are often associated with getting somewhere quickly and achieving something meaningful. Who hasn't heard ‘Just Do It’?

Back in the day, when men and women wore boots and boots had straps, we were exhorted to pull ourselves up by said bootstraps and achieve the near-impossible through hard work, tenacity and our own initiative.

These days, our boots may be sneakers or flip-flops, but in the midst of hard times, we're rediscovering our bootstraps.

Achieving what might seem to be the near-impossible — such as finding the necessary means to start a new business when funds have all but disappeared — is easier said than done, of course, but bootstrapping as a symbol for entrepreneurship is one that has stuck. And in our current unstable marketplace, bootstrapping is experiencing a resurgence as a viable option to traditional business start-up methods.

“We need to understand that there have always been bootstrapping entrepreneurs, so this is nothing new,” says Dr. Jeff Cornwall, author of the recently released Bootstrapping, part of Prentice-Hall’s Entrepreneurship Series. “But during a recession, there is a definite increase in bootstrapping efforts as bank loans and venture capital investments dry up — kind of the 'necessity is the mother of invention' effect.”

Cornwall, who holds the Jack C. Massey Chair in Entrepreneurship and is the Director of the Center for Entrepreneurship at Belmont University, contends that in tight economic times — especially in tight economic times — there is an increase in entrepreneurship, whether it be accidental, planned or opportunistic.

“Things line up in favor of entrepreneurs because big companies are weakened, which creates niches in the marketplace,” Cornwall says. “Big companies don't react to change, but entrepreneurs react speedily and nimbly.”

Resources a person needs for a start-up business, such as office or manufacturing space, labor and overhead expenses, are less costly during an economic downturn, allowing the entrepreneur to make money more quickly.

In a unique instance of bootstrappers helping bootstrappers, entrepreneur Betsy Jones founded Profit Sherpa, LLC, a company developed "to provide solutions for other entrepreneurs by relating their strategic goals to their day-to-day activities in marketing and operations; deploying lateral thinking to see more market opportunity, navigate new paths, and market creatively; and linear thinking to streamline processes, scale operations, and ensure dazzling customer service."

“My role is to work with high-potential entrepreneurs to help them build successful companies,” Jones says. “As Dr. Cornwall points out in his book, statistics show that 99.962 percent of all businesses in the United States are bootstrapped — they do not receive any venture capital to fund inception or growth. My business helps people look at four aspects of entrepreneurship: strategy, fitness of operations, marketing and finance.”

Most people start a business because they're good at something, but they aren't as knowledgeable or aware of the other aspects of running a business as they should be, Jones contends.

“As an advisor and consultant, I offer a high level of detailed advice to the entrepreneur, and I work as a 'thought partner' or sounding board to take an entrepreneur through the processes,” she says. “We brainstorm ideas and poke holes where needed.”

As an entrepreneur herself, Jones is respectful of other bootstrappers, but she says she's also frank: “I'm not a 'yes' person!”

Jones works with a lot of different types of businesses, and she says that the things that will move a business forward work in all businesses.

“You can take the fundamentals of bootstrapping and go into any business in any industry and make it work like a dream.”

Clint Smith and his crew at Emma are great examples of successful bootstrappers. Smith, along with co-founder Will Weaver, developed Emma, a Web-based service that allows customers to manage their own E-mail marketing and communications with "self-serve features, a custom-designed brand template, and personal assistance."

“We started Emma in late 2001 and early 2002,” he says. “Things were shaky out there after the dot.com bust, so many companies were hitting the wall in terms of securing funding.”

Smith admits that they decided not to raise money or hire people — thinking that goes against the traditional grain.

“We had a good idea. We decided to prove the viability of our idea and grow it organically,” he says. “We wanted to buy time to get past the idea phase and develop a working product, find paying customers, and gain more leverage. We took out a line of credit, and it turned out to be just enough for the start-up phase and until we became a cash-flow process.”

Smith says that his experience with Emma illustrates that there are other ways to approach the start-up of a new business besides securing venture capital.

"When we funded Emma with a bank line of credit, interest rates were low — as they are now — so it was pretty cheap money," he says. "And because it's a line of credit, you only pay interest on what you use."

In this way, Smith says, "a new business can pull in money when it's time for payroll, and push some back when the big, lovely client check clears."

Perhaps most importantly, unlike money from investors, a bank loan doesn't require a new business owner to give up a piece of the company.

“The tightening of available markets forces people to rely more heavily on bootstrapping,” he says and references economist Joseph Schumpeter, who popularized the term ‘creative destruction’ to refer to a new spirit of creativity arising out of ruin. “As far back as the 1940s, Schumpeter said that entrepreneurs reinvent the economy,” Cornwall says. “In every recession, as now, we're seeing that happen — people making something out of nothing.”

Jones agrees, saying, “An entrepreneur who bootstraps tries to do as much as possible with the resources she has, squeezing every bit of value out of every penny and not spending on things that don't matter. It makes a lot of sense, especially in an economic downturn, when available outside resources dry up.”

Smith points out that while bootstrapping does have its downside — “tiny (or non-existent) paychecks, and chairs that may or may not collapse at any moment” — that it also brings with it “the kind of stories that can only come from having 17 people crammed into a space designed for six. And it forces you to be especially clever in how you spend money, build and market your service, convince people to join your fledgling, chair-less enterprise, and basically make the most of not very much,” he says.

Venture capitalists can play a role in start-up businesses, but according to Cornwall, statistics show that only a fraction of a percent of entrepreneurs are backed by venture capital.

“Some people in academia and public policy want to say that the only worthwhile entrepreneurship is that which is backed by venture capital,” Cornwall says, “but that is simply not true.”

According to the Office of Advocacy of the Small Business Administration, over the last 20 years, an average of 78 percent of all new job creation has been generated by businesses with fewer than 200 employees.

“That's what is driving the economy,” Cornwall says. “And one of the worst things that could happen now? I'm petrified that the SBA will turn the money-spigot wide open and flood the small business sector with debt. We need to let people bootstrap — people need to be wily and creative and fix things with their own initiative.”

3 Comments on this post:

Dr Cornwall is spot-on.
Entrepreneurship is proven in the day-to-day management of non-existent cash.

It's making "it" happen, even when there is very little behind the curtain. You HAVE to do it, there are no alternatives.

But what about starting a multi-million dollar business on $5,000?
What about doing it 27 times over the last 20 years?
And what if you spilled your guts about the truth behind the failures, successes and stillborn companies that you had founded?

That's what I found recently in Bootstrap Business, a new book by Rich Christiansen and Ron Porter.

Betsy would appreciate this book. It blends the lateral idea generation with systematic process better than any business book I've read (and I've read hundreds).

Bootstrap Business is an actual guide, filled with key lessons and supported by anecdotes from the trenches of a serial entrepreneur's actual business. You can read about it and get free materials at www.BootstrapBusiness.org

Rich and Jeff need to connect. Blend the PhD's facts and figures with the serial entrepreneur's in-the-trenches experience, and you cover all the bases. Betsy ought to tap into that call (Leads? Shared insights? The ultimate triune?). I see sparks flying in a good way.